Watching the torturous turns of the healthcare debate in the Senate is mind-numbing, even for the most savvy policy wonks, let alone for members of the public. Each side in this debate has its own set of facts and scare statistics, and the resulting FUD -- fear, uncertainty and doubt -- have led to a colossal misunderstanding about healthcare cooperatives. That is unfortunate, since these co-ops may hold the key to a substantive compromise.

For liberals, and especially for single-payer advocates, their line in the sand has been drawn at the government-run public option, and so healthcare cooperatives represent another degree of sellout. Picking up a whiff of this discontent, some conservatives are supporting co-ops merely as a foil that can siphon support away from the much-demonized public option.

Yet private, nonprofit healthcare cooperatives, properly designed, actually could offer quite a lot to both the left and the right, as well as to anyone who is interested in expanding healthcare coverage, reducing costs and improving care. If the Senate combined nonprofit cooperatives with negotiated fees for each healthcare service -- both components having been offered up individually in various Senate proposals but not yet combined into the same package -- the making of a deal would be in sight. Indeed, nonprofit co-ops might prove to be a gift on the proverbial silver platter, because they could be just as effective as the public option and yet they will be easier to pass because Obama has some of the conservative senators thinking that it was their idea to begin with.

To understand why co-ops can work, it's important to understand how the healthcare market works. Or rather, doesn't work. According to the American Medical Association, insurance markets lack vigorous competition in more than nine out of 10 metropolitan areas. In 16 states, a single insurer writes more than half the policies, and nearly three-fifths of hospitals have little competitive pressure in the markets in which they operate.

That's because dominant insurers in a local market often pay healthcare providers high reimbursement rates to discourage them from participating in rival insurance plans. That discourages other insurers from entering the market, which in turn frees the dominant insurer to raise its premiums charged to its patients to cover the inflated reimbursements. In other words, the insurance companies make out, the doctors make out -- but the patients pay for it all.

The most direct way to break this logjam is to introduce a nonprofit element into the healthcare market. And here's the beauty of it: If designed correctly, it matters little if that nonprofit element is provided by the government or by a private organization, such as a cooperative. The effect on market dynamics is substantially the same, if the nonprofit can produce quality care for less money.

To see how this potentially could work, look to Germany. Germany has more than 200 private, nonprofit healthcare companies, which cover 92 percent of its population. Germany does not use a single-payer system but instead uses a "shared responsibility" system in which individuals and employers each are required to pay a premium of 6-7 percent of the individual's salary to the nonprofit healthcare companies. That percent is much smaller than what U.S. employers pay for their employees' healthcare. Despite spending only about 55 percent per capita of what the United States spends on healthcare, Germany still gets much better results for the 74 million Germans who use these nonprofits.

But while having more nonprofit players is necessary, it is not sufficient. After all, Kaiser and Blue Cross/Blue Shield are nonprofits, but they rake in huge earnings and pay multimillion-dollar CEO salaries. Group Health actually is a nonprofit cooperative, and while premiums at Group Health have increased less compared to those of competitors, the increases still have been fairly significant, averaging 12.3 percent per year since 2000.

So that's why negotiated fees for service are an additional crucial component needed to rein in costs. The impact of negotiations is best illustrated by another German practice, where representatives of the healthcare nonprofits deal with organizations of physicians, nurses, technicians and other healthcare professionals. Patient representatives also are given a seat at the table, and together they determine fees and rate ceilings for every treatment, procedure and doctor visit.

That combination -- of nonprofit companies and negotiated fees for service -- prevents costs from spiraling out of control. This system is better not only for individuals and families but also for businesses, since it not only makes healthcare costs for Germany's employers lower than in the United States but also allows them to better forecast and plan for these costs.

The Senate Finance Committee is scheduled to vote on its final proposal on Tuesday. The Finance bill includes co-ops, instead of a public option, but without enough clout to set rates with doctors and hospitals; the co-ops would have to cut individual deals with each provider, instead of negotiating across-the-board terms. Several Democrats joined all the panel's Republicans to vote down proposals to add a public option to the bill, in part because they think co-ops, not a public option, could get enough support to pass. But a bill that actually married co-ops with real negotiating clout -- the bargaining power of a public option without needing to involve the government -- might be an even better way to get the votes needed.

The good news for both liberals and conservatives is that nonprofit healthcare cooperatives could substantially impact market dynamics, without increasing the size of government. Both sides can have some of their cake, and eat it too. For those liberals who want a robust nonprofit element in the healthcare market, they'll get that. For those conservatives who don't want government playing a bigger role in healthcare, they'll get that.

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The following information is provided to help you understand the biases that may be inherent in this blog.My primary U.S. economic policy concern is the fiscal irresponsibility of government.The Baby Boom generation, which I am part of, has spent the past 30 years accumulating massive public debt that will be passed to our children, grandchildren, and subsequent generations.I am not opposed to the reduction or elimination of any government spending program.Yet, politicians tend to call for reduced spending in general terms and fail to publicly declare specific cuts they would make.The primary cause of the massive U.S. public debt is revenue reductions (in the form of tax cuts) without similar decreases in government spending.

I am willing to consider the expansion and addition of government programs as well.I do not mind how much or little the government provides to society as long as it is paid for.I am willing to pay higher taxes for services deemed worthy, whether they be national defense, homeland security, or income assistance to those less fortunate than I.And I am certainly willing to pay less in taxes or to deposit any government check I receive.My generation, the Baby Boomers, has been very good at cutting taxes and increasing the size of government, regardless of which political party is in power.This is a prescription for financial chaos that remains a horrible legacy for future generations.

About Me

I am a professor of economics at Jacksonville University, where I teach courses in introductory economics, comparative economic development, and globalization. I use this blog to keep in touch with my current and former students. Teachers and students at other schools, as well as others interested in economic issues, are welcome to use this resource.